Thursday, September 27, 2012

Increase Your Net Profit

Confused about why your gross profit is high but your net profit is low?
When
the ladies get them they look real. But when guys get spray tans they
look like Magda's twin brother from the movie "There's Something About
Mary." Spray tans last about 7 to 12 days. So if you are into this
stuff, you have to go every 1 to 2 weeks. That's a lot of tanning, and
that's a recurring fixed expense for you. Maybe that's where all of your
money goes.
Do you ever ask yourself: Where does all of the money go? Why do I feel like I have no money?
You
are killing it in your business, right? You are bringing in the
business. You think you are making good money. But every month when you
look at your net profit then at your business bank account, there isn't
much cash in there.
Every business owner spends money in 2 areas:
• The money you spend to produce/provide a service or product, which is costs of goods sold.
• The money you spend to keep your business up and running, which is called overhead.
Stay
with me here. You really need to understand this. It's so key to
getting a handle on your business money. You will have more clarity. You
will feel more in control. You could go to the moon! Seriously.
OK, here is an example...
Let's
say you are an event planner and you are planning a business conference
for Apple. Your fee is $100,000. You will supply and pay for event
production, flowers, tables, chairs, catering, and staff. You plan on
all of the expenses costing $70,000. So you plan on making $30,000, or
30% profit. The $30,000 is called your gross profit.
Gross profit = Revenue - Cost of Goods Sold
But the event ends up costing you $85,000. You are over budget. So your gross profit is only $15,000.
You
also have overhead to run your business. You have to pay for rent,
health insurance, your employee, and telephones for your office. This
costs $8000 every month.
Net profit = Gross profit - overhead.
So
in this case, your net profit is $15,000 - $8000 = $7000. That's it,
you made just $7,000 off of $100,000 in sales! Oy vey. We gotta get this
number up.
If we annualize this, your net profit for the year
would be $84,000. But the thing is, you left your corporate job where
you were making $80,000. So you are basically making the same amount of
money. Yes, you have more autonomy, have your own company, and have more
flexibility. But you are really making the same amount of money.
So something has to change if you want to increase your net profit. You have 3 choices:
• Raise your prices
• Lower the costs to produce the event such as your service or product, or stay on budget.
• Lower your overhead.
It's that simple. You make the decision. Then run with it. Just not to the tanning salon.